Question

If a company owns more than 20% of the stock of another company and the stock is being held as a long-term investment, which method would the investor normally use to account for this investment?

Answer 1

Answer:

Equity method .

Explanation:

Equity method is used to record the profits an organization made by investing in another company.

Equity method is a technique in accounting used in dealing with investment in associate companies. When the investing organization has between 20-50% of the voting stock in the associate company, an equity accounting method is always adopted, this is due to the high level of level it has in the management of the associate company.

Answer 2

Answer:

EQUITY METHOD.

Explanation:

Equity method is the process of treating investments in associate companies. Equity accounting is usually applied where an investor entity holds 20–50% of the voting stock of the associate company, and therefore has significant influence on the associate company's management. The investor records such investments as an asset on its balance sheet. The investor's proportional share of the associate company's net income increases the investment (and a net loss decreases the investment), and proportional payments of dividends decrease it.

Under the equity method, the investment is initially recorded at historical cost and adjustments are made to the value based on the investor's percentage ownership in net income, loss, and dividend payouts.

Therefore, the method the investor would normally use to account for this long-term investment is the EQUITY METHOD.